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Global stock indices were generally weaker in early trade yesterday and the selling picked up as the session went on. The majors reversed their gains from Monday following the release of a succession of poor data releases. Over the weekend China’s official Manufacturing and Non-Manufacturing PMIs both declined from the prior month. On Monday the US ISM Manufacturing PMI came in lower than expected while data from across the Euro zone was generally tepid, yet a touch better than anticipated. Yesterday China’s Caixin Manufacturing PMI dropped below 50 indicating contraction as did the UK’s latest PMI survey.

Investors are displaying a touch of nervousness now. The major stock indices (particularly in the US) have had a strong run since early February. Less than a fortnight ago the Dow Jones Industrial Average and S&P500 were just over 1% away from their all-time highs from last spring. However, there is some concern that global growth is undershooting targets, despite continued monetary stimulus. Last week first quarter US GDP came in at +0.5% - below expectations, and indicating the slowest rate of economic expansion for two years. Yesterday the European Commission released its spring economic forecast. They announced that Euro zone growth will be slower than previously expected while inflation would be subdued.

On top of this corporate earnings continue to disappoint. If this season continues to proceed as it has so far then it will register a third consecutive quarter of declining earnings.

The trouble is that it’s difficult to know where the next catalyst for a rally can come from. This is what happens when markets become dependent in central bank stimulus. Last week there was widespread disappointment after the Bank of Japan (BOJ) held off from announcing further monetary stimulus. The BOJ’s decision took many investors by surprise as recent earthquakes and a bout of yen strength had been considered the perfect cover for yet another round of intervention. The next official opportunity the BOJ has for announcing further monetary easing will be mid-June. The Federal Reserve meets at the same time, but all the US central bank can do is hold off from hiking rates. No doubt this will be seen as positive for equities, at least initially, yet a rate hike would certainly be negative. But it doesn’t say much for the underlying strength of the US economy if seven years on from the financial crisis the Fed is scared to raise rates by a paltry 0.25% to less than 0.75%.

The FTSE 100 index closed at 6,185.6 down 56.3 points on the day or 0.9%

Yesterday the German DAX fell 196.5 points or 1.9% to finish at 9,926.8

The US30 closed down 140.3 points to finish at 17,750.9 The S&P 500 ended 0.9% lower at 2,063.4 while the Nasdaq 100 ended down 0.9% at 4,341.4

Equities Update

Full year profits for Sainsbury’s (SBRY) were a touch better than the consensus expectation. But the ongoing supermarket price war continues to hold back progress. Group sales for the year to March 12th came in at £25.8 billion which were down 1.1% on the same period last year. Retail sales were up 0.4% but like-for-likes dropped 0.9 %. Earnings per share dropped 8.3% to 24.2p, ahead of the 22.9p per share forecast. Underlying pre-tax profits fell 13.8% to £587 million - better than the £577 million consensus expectation. The stock fell 3.5% in early trade but had recovered a touch by the time of writing.

Commodities Update

Yesterday crude oil closed lower again. On Friday both Brent and WTI contracts hit their highest intra-day levels since November last year. However, they reversed direction later in the day and have been falling ever since. The sell-off in crude has come despite ongoing dollar weakness. Typically dollar-denominated commodities tend to perform well when the greenback is falling. This is because they become more affordable for buyers who have to convert their own currencies in to dollars in order to buy oil on the international market. But oil traders seem much more concerned with supply and demand factors than any currency moves.

Monday’s sell-off was sparked by news that OPEC production had approached an all-time high. In addition there was a bigger-than-expected stockpile build at the Cushing, Oklahoma hub for the week ending April 29th. Also, as covered in earlier bulletins, the closer that Brent and WTI get to $50 per barrel, the more difficult it will prove to push higher. $50 is a big psychologically important level. But there are a number of US shale oil producers who have said that prices around $45/50 will encourage more drilling or provide a much-needed boost to cash flow. US producers have been responsible for a big drop in production recently. Consequently it may prove difficult for crude to rise much further should US production pick up once again.

Gold and silver rallied in early trade yesterday helped by further US dollar weakness. Once again gold pushed above $1,300 per ounce. However the dollar rallied later in the session and this pulled the rug from under the precious metals rally.

Gold had a substantial push higher last week, putting on the best part of 5%. Once again it could be time for some consolidation and a pull-back to $1,260 (or even $1,240) would be perfectly healthy in the current environment.

As for silver, the precious metal rose 6% in April and had four consecutive higher weekly closes. Again, a pull-back from here to around $17 per ounce wouldn’t invalidate the current rally.

Forex Update

The US dollar was sharply lower in early trade yesterday. The Dollar Index fell below 92.00 to hit its lowest level since January 2015. Meanwhile the EURUSD soared and briefly traded above 1.1600 - its best level since August last year. It was back then when the Chinese stock market collapsed triggering a widespread sell-off in global equities and risk assets in general. The Chinese authorities responded by imposing draconian restrictions on equity trading and by devaluing the yuan twice in one week. The dollar slumped in response.

The greenback managed to recover all of yesterday morning’s losses and more in early US trade. Despite this, there is a feeling that the US dollar could have further to fall. After rallying sharply from the summer of 2014 through to March 2015, the dollar was pretty much range-bound for the rest of last year. However, it has weakened considerably over the last five months with the EURUSD rallying 9% since early December. Yet despite this the EURUSD still hasn’t managed to take out last year’s August intra-day high of 1.1715.

The turnaround in the dollar has come as the US Federal Reserve rowed back from their prediction of 100 basis points of rate hikes for 2016. It now looks as if it can raise rates no more than twice this year – in June and December. September is seen as off the cards for any change (up or down) as it is so close to the November Presidential Election.

The Reserve Bank of Australia cut its headline Cash Rate to 1.75% from 2.0% overnight. The move began to get priced in last week after Australian CPI surprised analysts by turning negative. Nevertheless, the rate cut has led to fresh selling in the Aussie dollar. No doubt the RBA were also encouraged to cut rates for the first time in a year after China’s Manufacturing and Non-Manufacturing PMIs came in below expectations this weekend. In addition the Caixin Manufacturing PMI released yesterday came in under 50 (indicating contraction in the sector) for the fourteenth consecutive month.

The Japanese yen continued to strengthen yesterday, although it came off its best levels later in the session. The Bank of Japan (BOJ) surprised many last week when it held off from announcing additional monetary stimulus. Many traders had expected the central bank to cut rates further into negative territory and/or increase its QQE programme.

Upcoming events

Today’s significant economic events include Services PMIs from Spain, Italy, France, Germany and the Euro zone. We also have Euro zone Retail Sales, Spanish Unemployment and UK Construction PMI. From the US we have the ADP Non-Farm Unemployment Change, Trade Balance, ISM Non-Manufacturing PMI, Factory Orders and Crude Oil Inventories. German Bundesbank President Jens Weidmann will also be speaking.

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